Budget breakthrough solves California's long fiscal nightmare

SACRAMENTO — A tense, months-long standoff over ever-shrinking resources gave way Monday to a deal to bridge California's $26.3 billion deficit.

After more than five hours of closed-door talks, the state's "Big 5" — top legislative leaders and Gov. Arnold Schwarzenegger — emerged from the governor's office shortly before 7 p.m. "We are very happy to have a basic agreement," Schwarzenegger told reporters as the Democratic and Republican leaders of the Assembly and Senate stood by.

An agreement, which would go to both houses of the Legislature later this week, will allow the state to discontinue issuing high-interest I.O.U.'s to vendors and end the decline of the state's credit rating, which has undergone two recent downgrades to near junk-bond status.

The deal would include Democratic concessions of more than $14 billion in program cuts — hitting the poor, children, the elderly and disabled while avoiding outright elimination of the state's welfare-to-work CalWORKS program and the Healthy Families health insurance program for children.

Though they failed to get permanent reductions in welfare programs, Schwarzenegger and Republican legislators were able to uphold their vow of no new taxes with a series of accounting shifts and an enforced "loan" of nearly $4 billion from local governments.

Those accounting tricks include accelerating income tax withholdings from residents' paychecks by 10 percent, effectively shifting millions of next year's revenues into this year's budget, and delaying state workers' June 30, 2010 paychecks by one day — and thus, into next fiscal year.

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From the beginning, Democrats had little hope that they could win approval of tax increases, though they proposed popular measures such as $2 billion in taxes on oil companies, alcohol and tobacco sales and the closing of numerous corporate loopholes.

Although they represent barely more than one-third of either the Senate or the Assembly, Republicans have near-veto power over the proceedings, thanks to the constitutional requirement of a two-thirds vote for budgets and taxes.

Despite an ardent lobbying effort, cities and counties likely will take a major hit, with the state poised to borrow nearly $4 billion in revenues from property taxes and gas taxes. Critics say that will result in a devastating impact on local services.

"We know it's bad news for our constituents," said San Jose Mayor Chuck Reed. While the exact amount of state money that would be borrowed from the city has yet to be worked out, Reed said the end result will be "cuts to services and reductions in jobs."

Last month, cash-strapped San Jose finalized an operating budget that included a freeze on wages and dozens of layoffs while also raising fees and closing several parks, including Alum Rock, on Mondays. A big state hit, however, would force the city to re-examine cuts the city council had rejected, including to police, fire and library service.

Santa Clara County, which relies on state and federal funding for its safety-net programs, now faces another round of painful cuts after already closing a $273 million gap in its most recent budget. The board of supervisors also laid off dozens and took the ax to a number of health programs, including drug and alcohol counseling and mental health treatment.

Expecting some sort of state hit, supervisors created a special reserve of $63 million, in addition to the $93 million in the county's normal 5 percent contingency fund. But worst-case scenarios project as much as $280 million in new state cuts, which could lead to long-avoided cuts to social services and public safety.

The county also would delay repairs on 46 miles of county roads that had been scheduled for work this year. And plans to add merging lanes on Central Expressway will likely be stopped.

"It goes beyond this project or that project, and it goes beyond potholes," said Dan Collen, deputy director of the county's Roads and Airports Department. "Our ability to respond to storm damage, traffic signal problems, bridge safety work, signage and striping — and less urgent issues such as sidewalks, pedestrian ramps and parking problems — all are threatened. "

Schools took a $9.3 billion cut in February's budget deal but won a commitment to be paid back and an assurance that in future years, the base of Proposition 98 — the state law that lays out minimum funding levels for education — won't be ravaged by this year's steep revenue decline.

Schwarzenegger's call for a 5 percent pay decrease for state workers fizzled, though he is expected to keep three monthly furlough days through next June.